Brightspark's Approach to Seed Deals

Posted by Éléonore Jarry-Ferron on Sep 18, 2018

Brightspark is broadening its investment focus. While the core of what we do is – and will remain – investing in Series A stage companies, we are moving up and down the VC investment pipeline. In the future, you will likely see us placing extra-selective bets on pre-Seed/Seed companies, as well as backing more mature companies at an early growth stage.

Why are we expanding our investment focus? 

As the Canadian VC landscape matures, more capital is being deployed at the early-stages, and an influx of international investors are looking at Canadian companies – the VC ecosystem is much more competitive than it was a few years ago. 

At the same time, we’re seeing an incredible amount of exciting companies at very early-stages, notably in the applied AI space. We have always been vocal about our love for “swing for the fences” companies, those that have the potential to completely redefine industries. As more early startups fit these criteria, we want to continue making the best investments possible when it makes sense for us, the company, and our investors – without limiting ourselves to a stage focus. 

So, our team is dedicating more time and energy to working with founders that are still in the nascent steps of their companies. We believe that we can provide a lot of expertise and value to founders, and this commitment is extremely complementary to Brightspark’s investment thesis. 

Despite our unique investment model, we will continue to be a structured, bonafide VC partner for entrepreneurs. In the last year, we’ve grown our investment team to broaden our expertise and diversify our involvement in the VC community. We think that this flexibility will give us an edge in the ecosystem. 

How we define “pre-Seed/Seed” 

Generally speaking and by definition, a Seed company is at a very early stage in their lifecycle and requires capital to fund continued product R&D and business model iterations. An initial seed investment round typically ranges from $250,000 to $1,000,000. 

To us, investing in companies at this stage means taking more risks than usual by partnering hands-on with an exceptionally solid team that has some proof points of their technology working as well as proof of market fit, but no significant market traction nor moving parts in their business model. 

As an investment, pre-Seed/Seed companies have very unique characteristics and can be an interesting way for investors to diversify their portfolio – more on that later. 

Brightspark’s investment criteria for Seed investments

The underlying core of our investment criteria is a result of our team’s 25+ years of experience building, operating, and investing in early-stage tech companies. This post about our approach from 2016 still rings true today.

TL;DR: We invest in the team first: people that we trust, that are experts, and that we get along with. We look for a fair price and valuation, a huge market, and companies that show potential for massive returns. We invest in “IP based tech” in various industries. We never invest based on hype or FOMO, and we always seek aligned interests (ours, the company's’, other investors’, and our network’s).

We will continue to apply this thesis to all the companies we invest in. But because Seed companies are early in their journey, some of the criteria of our due diligence are much more difficult to assess. 

So, we established a set of criteria to evaluate pre-Seed/Seed companies. We ask ourselves:

1. Does the company have an exceptional team with whom we have a special connection, strong conviction and deep trust? 

The deep confidence we need to have in the team is even more so important for pre-Seed/Seed investments. The earlier the company, the more hypotheses they have to test, the more problems they can run into, and the more challenging the years ahead. We need to be comfortable that the team will stay strong, and be able to navigate through all the loops and turns to come. 

Because we invest earlier, we also expect that our investment holding period will be longer than usual. We partner with individuals that we believe will do right by us, be transparent, at every funding milestone- and that trust us to do the same.

2. Is the company developing a ''swing for the fences'' idea in a huge market? 

We usually have less visibility on market timing and competition at this stage. To mitigate this risk, we focus on markets that we know are big enough for multiple companies to succeed, combined with companies that could be worth $1B+. 

3. Does the company have earned secrets and proprietary tech? 

Although pre-seed/seed companies have little to no market traction and poor visibility on other stealth-mode competitors, we only partner with teams that have a special edge (either from their technical background or their market insights) that allow them to do something completely different than everybody else.

4. Does the team have domain expertise?

We need to know that the team are world experts, with deep knowledge and competence in the area they are tackling. 

What does it mean for the individual investors in our network?

Investors in the Brightspark network may occasionally see some investment opportunities that are at earlier and later stages. If you’re an investor with us, you can be confident that we will only present opportunities that we fully believe in. In fact, Brightspark’s Partners have skin in the game in every company we invest in. 

If you do participate in our pre-Seed/Seed deals, you should know that investment at this stage has its own set of characteristics:

  • Risk: Much riskier than later-stage VC investments. Many companies fail and never make it to a Series A.
  • Upside: Potential for higher multiples than later-stage VC investments.
  • Re-ups: Very likely, so investors should reserve for future allocations ($1 reserved for $1 invested, or $2 for $1) for future rounds to avoid dilution. 
  • Timing: If there is an exit, it usually takes 7-10+ years.
  • Data room/diligence information: Much more scarce than later stage VC investments
  • Investment size and allocation: Investors should consider writing smaller cheques than their usual average in the smaller pre-seed/seed rounds.

All Brightspark opportunities are made available to accredited investors on our platform. Because these rounds are usually smaller with less room available for individual investments, investors should expect these deals to fill up quickly or get oversubscribed.

What does it mean for founders and the startup community?

For founders of tech companies at a Seed stage

As mentioned, these investments will take place with exceptional companies and founders with who we have a personal relationship. Because of the special nature of these investments, it’s very unlikely that a “cold” approach from Seed founders will result in an investment in the short term. 

That’s because we build relationships with companies long before making an investment - and this is particularly true for companies at an early stage. We track entrepreneurs closely, and when we invest in a company, we have usually spent up to 2 to 3 years building that trust. 

For other Seed investors

We are lucky to have strong relationships with some of the best seed VCs, angel investors, and accelerator programs in Canada. We cherish these connections and love to collaborate and co-invest in early-stage opportunities. 

If you’re a pre-seed/seed investor or early-stage community leader, and you aren’t in contact with our team yet – we’d love to hear from you.

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